With the political activity relating to the sovereign debt crisis most likely to diminish this week, we speculate there will be fewer downgrade announcements coming from the rating agencies along with an absence of central bank comments, which could mean there could be some pressure relief going into yearend.
Last Friday, with the financial markets waiting in nervous anticipation, the European leaders delivered a carefully crafted message from Brussels that they had reached an historic agreement to draft a new treaty intended to create closer economic integration in an effort to confront the sovereign debt crisis.
A look back at the week in volatility
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Last week, in a coordinated effort to lower the dollar funding costs for European banks the US Federal Reserve along with five other central banks lowered the three-month euro swap rate, allowing European banks to pay a lower premium to borrow dollars in the swap market.
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Usually when the financial media mentions record events, they refer to new highs or other positive developments. However, last week it was to draw attention to the worst Thanksgiving week on record for equities.
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Without the negative sovereign debt news coming from Europe, equities would be responding positively to the normal seasonal strength that typically begins in November and runs through January. Now however, it looks as if there could be another test of the lows.
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Despite the headwinds coming from Europe, we think the chances are quite good the current strength will continue through year-end.
Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.